The focus of budget discussions must be addressing the long-range fiscal issues facing our state. Simply increasing taxes this year without other critical program changes will not solve our fiscal problems. Now is not the time to falter; it is time to act responsibly.
Budget negotiations for fiscal year 2020 will end by June 30, 2019. Hopefully these negotiations will be successful, and New Jersey can move forward to execute programs to help people at a responsible cost.
I was — many years ago — the Budget Director and Comptroller for two New Jersey governors, and now teach budgeting and management courses at Princeton University and Rutgers University. My students always ask how much math they need to know. Calculus, they ask? I tell them if they can add and subtract, all will be fine provided they apply logic, clear thinking, and an appreciation of public policy, tax issues and the needs of the people.
I remind them what a budget is, specifically: a planning document — short- and long-term; a statement of goals and objectives; a forecasting and monitoring document; an outline of services to be provided; a performance and accountability document; a mechanism for making decisions and, yes, a political document. Currently in New Jersey, short-term politics is the dominating element, more so than necessary.
Most of the recent rhetoric about the budget is focused on what happens when the governor receives a document that he does not like: Will he veto it entirely; line-item veto certain items; or reluctantly approve the budget as submitted?
The principal item of disagreement is the governor’s proposal to increase taxes on incomes above $1 million (the rate of 10.75 percent currently applies only to incomes in excess of $5 million). Expanding the income tax brackets would yield approximately $500 million.
But this should not be the issue. Rather, the focus must be how to address the long-range fiscal problems facing the state. Simply increasing taxes this year without other critical program changes will not address the long-range problems.
New Jersey is at a critical stage in its financial history. We have struggled to balance our budget for years. We have the second-lowest credit rating in the country; our pension systems are among the worst-funded in the nation, with a liability of $99.6 billion; the net liability of the health benefit systems for all government employees has recently been re-evaluated upward to $90.4 billion. And, we have long-term bonded debt of $45 billion — or a total obligation of almost $235 billion; it was $129 billion just four years ago but a re-statement of health benefit liabilities significantly increased these obligations. This number is what the rating agencies look at and why they award New Jersey such a low credit rating and it is the number that must be addressed.
The good news is in the short term we are projecting a surplus in our operating budget in excess of $1 billion for both this current year and the year ending June 30, 2020. So, now is the time to address our long-range problems.
It is not the time to award token income tax credits for special interest groups or to initiate or expand programs. Rather, it is the time to make fundamental change. It is time to emphasize what I tell my students is a key component of budgeting — using the budget process as a long-range plan to address festering fiscal problems.
Based on reasonable projections of future revenues and future spending, the funding gap in the next few years will reach between $3.2 billion and $4 billion. This gap is driven principally by unfunded pension and health benefit liabilities, but also a shortfall of at least $1.3 billion in school funding (a subject for another day); healthcare, including Medicaid; and transportation, especially NJ Transit. Other needs will develop related to a range of needed social services and higher education commitments.
Our bonded debt is $45 billion, the third-highest in the nation, yet our infrastructure is rated D+ by the American Society of Engineers and the capital needs as computed by the State Budget Crisis Task Force, co-chaired by Paul Volcker, is in excess of $135 billion, principally for transportation, wastewater treatment, storm water management and drinking water.
Property taxes remain the highest in the nation. Last year total property taxes levied reached almost $30 billion — an increase of 2 percent — more than the sales, income and corporate taxes combined.
Based on the “Path to Progress” report (prepared by the Economic Policy Committee co-chaired by Senate President Steve Sweeney with participation from Republicans and Democrats and a volunteer group of 35 policy and fiscal experts; full disclosure, I was a member of the volunteer group), the following summary of the recommendations is a good start:
Change the structure of the public pension systems so that new employees and non-vested employees would be enrolled in a new hybrid system such that the first $40,000 of salary would be credited to the current defined-benefit system, while remaining salary would be computed as part of a new 401k-like system. NO retired employee or a vested current employee would be affected;
Change all employees at all levels of government from the current “platinum” level of health coverage to a “gold” level;
Merge certain school districts (K-4; K-5; K-6; K-8) into K-12 regional districts. No local school building would close but overhead costs would be significantly reduced and, more important, school curricula would be re-aligned and dramatically improved;
Require more shared services among municipalities and counties — think three or more municipalities sharing police and/or trash removal services, etc. Also, think a county-wide property assessment system (21 assessors) instead of one assessor for each municipality (565 assessors);
Explore the viability of adding major statewide assets to the pension system to reduce the unfunded liability.
Another point of contention is the. The governor proposed it, but the Legislature removed it. Of course, it should be re-established and funded; $200 million would be a good start. We need this “protected reserve” — we will have another recession.
Would these actions immediately solve the state’s problems? No, but in the long run they would significantly reduce our unfunded pension and health benefit liabilities, reduce state costs, and put us on a more sustainable short- and long-term path. Moreover, these measures would significantly reduce or at the least stabilize property taxes as employee benefit savings, school mergers and shared services would reduce local and school costs.
The Legislature and the governor should take this opportunity to address the state’s mounting problems instead of passing just another annual budget. Long-range fiscal planning and solutions are keys.
Do these recommendations suggest there would be a reduction in state taxes or that a future increase in income tax on millionaires or other folks would not be required? Unfortunately, there are no guarantees in life or in tax policy.
If I were a betting person I would say: “Do not discount future tax increases,” but I would also posit any revenue/tax increase would be easier to explain and justify if the public observes that the state has done all it could to reduce costs responsibly.
A final point: I would urge the governor and the Legislature to appoint immediately a nonpartisan group of folks to examine the existing state and local tax structure and ascertain if a better mix of taxes and revenues would improve tax collections and improve tax equity. A comprehensive tax policy approach is desirable.
Now is not the time to falter or delay — it is the time to act responsibly.